Indian Income-Tax Act, 1922 (Act 11 of 1922), s 4(3) (i)-
Trust for religious and charitable objects some within
taxable
territories and some outside-Income not allocated-
Exemption, if can be claimed.

HEADNOTE:

A trust was created for four religious and charitable
objects, two of the objects were within taxable territories
and the
other two were outside the taxable territories. The
income derived from the trust property was not allocated or
set apart for the
said purposes. The Trustees were assessed
to Income-tax on income derived on the Trust property. The
Trustees' claim for exemption
under s' 4(3) (ii) of the
Income-tax Act was not accepted by the Revenue and the High
Court. In appeal to this Court the, Trustees
contended that
proviso (a) to s' 4(3) (i) of the Act would be attracted
only when the Trustees exctcised their option to apply
the
income to religious or charitable purposes outside the
taxable territories, that in the present case the Trustees
had
not exercised the said option, and that therefore their
case was directly governed by the substantive part of cl.

(i) of s. 4(3) of the Act.

HELD : Under cl. (i) of s. 5(3) of the Act only income from
the property wholly or in part held in trust actually
applied or
set apart for application for future spending on
religious or charitable purposes within the taxable
territories is exempted
from inclusion in the: total income
[390 G-H]
The substantive part of cl. (i) of s. 4(3) is in two parts :

the first part relates to the income derived from property
held under trust whooly for religious or charitable purposes
and the
second part to income derived from property held in
part only for such purpose. The words "applied 'Or finally
set apart for application"
in the second part indicate that
unless the income from the, said property is applied or
finally set apart for the purposes
within the taxable
territories, the said income does not earn the exemption.

There cannot be any reason why a different meaning should be
given to the expression "applied or accumulated for
application"
in the first part of the clause, for, on
principle, there cannot be any possible distinction between
such income from the
property wholly held under the trust or
a part of the property held in trust. The words "applied"
and "accumulated" , therefore,
must mean "applied or finally
set apart". "Applied" means that the income is actually
applied for the said purposes in the
taxable territories;

and "accumulated" means that the income is set apart during
the year for future spending on the said purposes. The
expression
"accumulated for a purpose" involves a conscious
act in presenti and posits a clear indication on the part of
the trustee to set
apart the income for that purpose [390 B-
G]
'Till the Trustee set apart the accumulation for the
purposes within the taxable
territories, it cannot be said
that Me, purposes are within the taxable territories. [392
CT
385
Mohammad Ibrahim Riza V.
Income-tax Commissioner, Nagpur,
(1930) L.R. 57 I.A. 260, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 491, 492 of
1964.

Appeal by special leave from the judgment and order dated
September 14, 1962 of the Andhra Pradesh High Court in Case
Referred No.
4 of 1961.

The Judgment of the Court was delivered by
Subba Rao, J. This appeal by special leave raises the
question of the, true construction
of the provision of S.

4(3) (i) of the: Indian Income-tax Act, 1922, hereinafter
called the Act.

The relevant facts may be briefly stated. By an indenture
dated September 14, 1950, H.E.H. the Nizam of Hyderabad
created
a trust known as "H.E.H. the Nizam's Religious
Endowment Trust", hereinafter referred to as the Trust,
under which he
settled certain securities of the face value
of Rs. 40 lakhs for implementing the objects described in
the Trust deed. Under
the Trust deed three trustees were
appointed, including the settlor. It will be convenient at
this stage to read the relevant
provisions of the trust
deed.

Clause 3. The Trustees shall hold and stand
possessed of the Trust Fund upon Trust.

(a) To manage the Trust Fund and to recover
the interest and other income thereof.

(b)
(c) During the life-time of the Settlor the
balance of the income shall be accumulated and
shall
be added to the corpus of the Trust
Fund.

(d) On and after the death of the Settlor
the Trustees shall hold the accumulated corpus
of the Trust Fund
upon trust to spend the
income thereof for any one or more of the
following religious or charitable objects
in
such shares and proportions and in such manner
as the Trustees shall in their absolute
discretion
deem proper.

(ii) For help either in lump sum or by way of
monthly allowances, to the Khuddam or the
servants who
are looking after the sacred
Shrines, and also by way of charity to pious
people residing at these holy places.

(iii) For the up-keep of the sacred buildings
constructed in the life-time of the Settlor
such as, masjids
(mosques), Azakhana (mourning
house, built to commemorate the name of His
Exalted Highness's late mother),
two
Askurkhanas (where the Alam sits inside the
City palace during Moharram and Ramzan), and
the Maqbaras
(Tombs) and particularly
mentioned in the Second schedule hereunder
written.

(iv) For the annual expenditure during the
mourning period of Moharram and Safer and also
during other religious
months, when different
kinds of ceremonies, religious discourses
(Taqreers) Id Tagreebs, etc. are performed,
including the religious offerings to the
sacred Shrines at Ajmer and Gulbarga.

(v) It is the desire of the Settlor that the
income of the Trust shall, as far as possible,
be spent equally
for the above mentioned four
religious and charitable objects and purposes
and in the event of there being any surplus
then the same may be spent by the Trustees for
any other religious and charitable objects for
the benefit of
Sunni Mohamedans with liberty
X X
to the Trustees in their absolute discretion
to accumulate the surplus, if any, for
any
year or years and utilize the same for the
purposes in this
387
clause provided for any subsequent
year or
years.

Clause 4. It is hereby further agreed and
declared that in all matters wherein the
Trustees have a discretionary
power the votes
of the majority of the Trustees for the time
being voting in the matter shall prevail and
be binding on the minority as well as on those
Trustees who may not have voted and if the
Trustees shall be equally
divided in opinion
the matter shall during the life-time of the
Settlor be decided according to the opinion of
the Settlor and after his death according to
the opinion of the Trustee most senior in age
for the time being.

Briefly stated, under the deed the Trust fund was to be
accumulated during the life-time of the settlor and, after
his death,
the Trustees should hold the said fund upon trust
to spend the income therefrom for one or more of the four
religious and charitable
objects mentioned therein. Two of
the said objects were for religious and charitable purposes
within the taxable territories
and the other two for
purposes outside the taxable territories. It is important
to notice that under the deed no power was
conferred on the
trustees during the life time of the settlor to set apart
and allocate the accumulated income or a part of it
from the
Trust properties for any one or more of the objects
mentioned therein : that could be done only by the Trustees
after the death of the settlor. The said settlor is still
alive. For the assessment years 1952-53 and 1953-54 the
Trustees
were assessed to income-tax on the income during
the relevant previous years arising from the said Trust
property. The Trustees
claimed exemption under S. 4(3) (ii)
of the Act. The Income-tax Officer, on appeal the Appellate
Assistant Commissioner, and on
further appeals the Income-
tax Appellate Tribunal, Hyderabad, concurrently held that
the assessee was not entitled to the exemption
under the
said section. At the instance of the assessee, the
following question was referred to the High Court under s.

66(1) of the Act
"Whether the income arising from property
settled upon trust under the deed of
settlement, dated 14-9-1950, or any part
thereof is exempt from tax under Section 4(3)
(i) of the Indian Income-tax
Act, 1922."
A Division Bench of the Andhra Pradesh High Court, Hydera-
bad, consisting of Seshachelapati and Venkatesam, JJ, on
a
388
consideration of the relevant provisions of the deed and the
Act, came to the conclusion that on the terms of S. 4(3) (i)
of
the Act, the Trust was not entitled to the exemption.

Hence the appeals.

Mr. Narasa Raju, learned counsel for the assessee, contended
that proviso (a) to S. 4 (3 ) (i) of the Act would be
attracted
,only when the Trustees exercised their option to
apply the income to religious or charitable purposes without
the taxable territories,
that in the present case the
Trustees had not exercised the said option and that,
therefore, the assessee's case was
directly governed by the
substantive part of cl. (i) of s. 4(3) of the Act. As the
income was being accumulated by the Trustees,
the argument
proceeded, without setting apart the whole or any part
thereof for one or other of the purposes mentioned in
the
Trust deed, it should be held that the Trustees were
accumulating the income for religious or charitable purposes
within
the taxable territories, since two of the named
purposes were admittedly within the taxable territories. He
would say that
if the Trustees exercised their option to
apply the fund for the purposes without the taxable
territories, the Income-tax
authorities could, in terms of
the proviso, include that income in the total income.

Mr. A. V. Viswanatha Sastri, learned counsel for the Reve-
nue, on the other hand, argued that the assessee would be
entitled
to exemption under S. 4(3) (i) of the Act only if
the income was specifically accumulated for religious and
charitable purposes
within the taxable territories and that,
as in the present ,case admittedly there was no setting
apart of the income for the
said purposes, the assessee
could not claim any exemption thereunder.

Let us now scrutinize the validity of the rival contentions.

Section 4(3) (i) of the Act reads :

"Subject to the provisions of clause (c) of
subsection (1) of section 16, any income
derived from
property held under trust or
other legal obligation wholly for religious or
charitable purposes, in so far as such
income
is applied or accumulated for application to
such religious or charitable purposes as
relate
to anything done within the taxable
territories, and in the case of property so
held in part only for such
purposes, the
income applied or finally set apart for
application thereto
389
Provided that such
income shall be included in
the total income-
(a) if it is applied to religious or
charitable purposes
without the taxable
territories, but in the following cases,
namely :-
(i) where the property
is held under trust
or other legal obligation created before the
,commencement of the Indian Income-tax
(Amendment) Act, 1953 (25 of 1953), and the
income therefrom is applied to such purposes
without the taxable
territories; and
(ii) where the property is held under trust
or other legal obligation created after such
commencement, and the income therefrom is
applied without the taxable territories to
charitable purposes
which tend to promote
international welfare in which India is
interested.

The Central Board of Revenue may, by general or special
order, direct that it shall not be included in the total
income.

Under this section a particular class or kind of income is
exempted from taxation. It is settled law that the burden
is on
the Revenue authorities to show that the income is
liable, to tax under the statute; but the onus of showing
that a particular
class of income is exempt from taxation
lies on the assessee. To earn the exemption, the assessee
has to establish that his
case clearly and squarely falls
within the ambit of the said provisions of the Act.

A brief history of cl. (i) of S. 4(3) of the Act will be
useful in the interpretation of its terms. The present cl.

(i) was substituted for the following clause by the Income-
tax (Amendment) Act, 1953, with effect from April 1, 1952 :

"(i) any income derived from property held in
trust or other legal obligation wholly for
religious or
charitable purposes, and in the
case of property so held in part only for such
purposes, the income applied or finally
set
apart for application thereto."
Under the said clause,, trust income, irrespective of the
fact whether the said purposes
were within or without the
taxable territories, was exempt from tax in so far as the
said income was
390
applied or finally
set apart for the said purposes.

Presumably as the State did not like to forgo the revenue in
favour of charity outside the country, the amended clause
described
with precision the class or kind of income that is
exempt thereunder so as to exclude therefrom income applied
or accumulated for
religious or charitable purposes without
the taxable territories. The substantive part of cl. (i) is
in two parts : the first
pan relates to the income derived
from property held under trust wholly for religious or
charitable purposes and the second
part, to income derived
from property so held in part only for such purposes. But
the necessary condition for attracting the first
part of the
clause is that the said income is applied or accumulated for
application to such religious or charitable purposes within
the taxable territories; and to attract the second part, the
income from the property so held in part shall have been
applied
or finally set apart for application to the said
purposes. A comparative study of the two part-, clarifies
the scope of the
provision. The expression used in the
first part is "applied or accumulated for application" and
the expression used in
the second part is "applied or
finally set apart for application". The words "applied or
finally set apart for application"
in the second part
indicate that unless the income from the said property is
applied or finally set apart for the purposes
within the
taxable territories, the said income does not earn the
exemption. There cannot be any reason why a different
meaning should be given to the expression "applied or
accumulated for application" in the first part of the
clause; for,
on principle, there cannot be any possible
distinction between such income from the property wholly
held under trust or
a part of the property held in trust.

The words "applied" and "accumulated", therefore, must mean
" applied or finally set apart". "Applied" means that the
income is
actually applied for the said purposes in the
taxable territories; and "accumulated" means that the income
is set apart during
the year for future spending on the said
purposes. The expression "accumulated for a purpose
involves a conscious act
in present and posits a clear
indication on the part of the trustee to set apart the
income for that purpose. It is, therefore,
manifest that
under cl. (i), only income from the property wholly or in
part held in trust actually applied or set apart
for
application for future spending on religious or charitable
purposes within the taxable territories is exempted from
inclusion
in the total income.

As has been pointed out by Craies in his book on Statute
Law, 6th Edn. at p. 217, "The effect of an excepting or
391
qualifying
proviso, according to the ordinary rules of
construction, is to except out the preceding portion of the
enactment, or to
qualify something enacted therein, which
but for the proviso would be within it." The proviso to cl.

(i) excepts the two classes of income subject to the
condition mentioned therein from the operation of the
substantive
clause. It comes into operation only when the
said income is applied to religious or charitable purposes
without the taxable
territories. In that event, the Central
Board of Revenue, by general or special order, may, direct
that it shall not be included
in the total income. The
proviso also throws light on the construction of the
substantive part of cl. (i) as the exception
can be invoked
only upon the application of the income to the said purposes
outside the taxable territories. The application
of the
income in presents or, in future for purposes in or outside
the taxable territories, as the case may be, is the
necessary condition for invoking either the substantive part
of the clause or the proviso thereto.

The argument of Mr. Narasa Raju, namely, that as at the time
the income was accumulated the Trustees did not exerciser
the option,
the accumulation would necessarily be for some
of the purposes within the taxable territories, leads to a
fallacy. If accepted,
it would enlarge the scope of the
exemption : while the section expressly exempts only such
income as is applied or accumulated
for application for such
purposes within the taxable territories, the income would be
exempted even though it was accumulated for
mixed purposes,
that is, for purposes both within and without the taxable
territories. Purposes within the taxable territories
are
not the same as mixed purposes. At best the amounts are
kept under a suspense account with an Options to the
trustees
to set apart at a later date for purposes within or
without the taxable territories. Howsoever the option is
exercised at a later
stage, it is not an accumulation during
the, relevant accounting year for purposes within the
taxable territories.

Some of the cases cited at the Bar may not be of direct
application, but the principle laid down therein may be
helpful
in construing the terms of the present Trust deed.

The Judicial Committee in Mohammad Ibrahim Riza v. Income-
tax Commissioner, Nagpur(1) held that where the purposes of
a trust
were not wholly charitable or religious and no
portion of the property had 'been set aside for those
purposes, the income
from the trust could not be identified
as appropriated exclusively thereto. The
(1) (1930) L.R. 57 I.A. 260.

392
principle underlying this decision is, where a trust is for
mixed purposes, some religious and other secular, with an
option
to the trustee to select one or other of the
purposes, it is not possible to predicate till the selection
is made that
the object is for religious or charitable
purposes. In the present case, an option is given to the
Trustees to set apart the
income for the purposes within the
taxable territories or without such territories and till a
selection is made it is not equally
possible to predicate
that the accumulation of income is for purposes within the
taxable territories. Till the Trustees set
apart the
accumulation for the purposes within the taxable
territories, it cannot be said that the purposes are within
the taxable territories.

Mr. Narasa Raju attempted to argue that in the present case
the income was set apart for purposes within the taxable
territories.
This aspect of the question was never raised
till now. It involves a question of fact. Clause 3 (d) (v)
of the Trust deed
on which reliance is placed is only an
expression of desire on the part of the settlor that the
income of the Trust should
be spent equally on the four
religious and charitable purposes mentioned in the deed.

The said desire does not amount to setting apart by the
Trustees of the whole or a part of the income from the Trust
for purposes
within the taxable territories. Indeed, cl. 3
(d) of the Trust deed indicates that the Trustees have no
power to set apart
or accumulate the income for any of the
purposes mentioned in the Trust deed till after the death of
the settlor. We cannot, therefore,
hold on the material
placed before us that the Trustees have set apart the
accumulated income for purposes within
the taxable
territories.

For the aforesaid reasons we hold that the answer given by
the High Court to the question referred to it by the Income-
tax Appellate
Tribunal is correct. The appeals fail and are
dismissed with costs. One hearing fee.

Appeals dismissed.

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